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A small business accounting program should accomplish three tasks:
track income and expenses, generate business forms, and keep detailed
records for other assets and liabilities.

Tracking Income and Expenses

The task of tracking a business’s income and expense is really the most
important job of an accounting system. If you own or manage a small
business, obviously, you need some tool for measuring your income and your
cash flow.

Although checkbook programs like Quicken and Microsoft Money does
little more than keep a checkbook, you can actually keep financial records
for a business right out of a checkbook. To do this, you simply categorize
deposits as falling into some income category. And when you write a check
or make some other withdrawal, you categorize expenses as falling into
some expense category.

One problem with using a checkbook program, however, is that by using a
checkbook program, you are implicitly using cash-basis accounting to track
your income and expenses. Cash-basis accounting counts income when you
receive a deposit and counts expense when you write a check.

Cash-basis accounting is easy to understand, and that means you are
less likely to make errors in implementing it. However, cash-basis
accounting is generally too imprecise for more complicated businesses. If
you use inventory in your business, for example, cash-basis accounting
isn’t very accurate—and the Internal Revenue Service does not allow it.

And there are other circumstances, too, in which cash-basis accounting
produces serious and usually unacceptable errors in precision. For
example, if you often receive money before you have actually earned it or
if you often incur expenses long before you actually have to pay for them,
you need to use a more sophisticated accounting program than a checkbook
program.

Generating Business Forms

The second task that a small business accounting program should help
you with is the generation of business forms. The most common business
form is simply a check. Any checkbook program help you do this. Other
business forms that small businesses commonly need to produce include
invoices, credit memos, monthly statements, purchase orders, and so forth.

If you have a small business with very simple form requirements—perhaps
you need only checks—then a checkbook program may work very well for you.

However, if you have extensive or complicated business form generation
requirements, a more full-featured small business accounting package, such
as Intuit’s QuickBooks, Peachtree’s Complete Accounting, or Microsoft
Small Business Accounting will do a better job for you.

If you produce more complicated forms, but you produce these other
forms with a word processing program, then a checkbook program may still
work for you.

Detailed Record Keeping for Other Assets and Liabilities

The third task that a small business accounting program should help you
with is detailed record keeping of your most important assets and
liabilities. A checkbook program lets you keep good detailed records of
cash, and for some businesses that is the principal asset. But many small
businesses have other significant assets and liabilities they need to
track, for example, accounts receivables, inventory, and vendor payables.

Whether or not a particular software program’s accounting tools provide
adequate asset and liability record keeping depends on the situation.
However, no small business accounting program does everything you need it
to do. Any accounting program that provides an extensive list of features,
by its very nature, becomes a challenge to use. For example, moving to the
accrual basis of accounting adds an entire layer of complexity to
financial record keeping, and keeping detailed records of inventory adds
another layer.

For these reasons, even when a particular program doesn’t do everything
you need it to do, your best choice still may be to use the program—and
then simply live with its shortcomings.